Q3 2021 SilverBow Resources Inc Earnings Call
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Hello, and welcome to the silver about resources third quarter 2021 earnings Conference call.
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After the Speakers' remarks, there will be a question and answer session.
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I would now like to turn the call over to Mr. Jeff Maggie. Please go ahead Sir.
Thank you Lisa and good morning, everyone. Thank you very much for joining us for our third quarter 2021 conference call with me on the call today are Sean Woolverton, our CEO.
Steve Adam our CFO and Chris abundant our CFO.
Yesterday afternoon, we posted a new corporate presentation to our website and will occasionally refer to it during this call we encourage listeners to download the latest materials.
Please note that we may make references to certain non-GAAP financial measures, which are reconciled to their closest GAAP measure in the earnings press release.
Our discussion today may include forward looking statements, which are subject to risks and uncertainties many of which are beyond our control. These.
These risks and uncertainties are described more fully in our documents on file with SEC, which are also available on our website.
With that I will turn the call over to Sean.
Thank you, Jeff and thank you everyone for joining our call. This morning.
I'm extremely proud of silver both third quarter results and the progress we have made towards our key objectives.
Which we show on slide six of our presentation.
During the quarter, we focused on maximizing our full year free cash flow, adding high return inventory in both the Eagle Ford and Austin chalk.
And executing on accretive M&A.
Since the beginning of August we have announced three acquisitions, which are accretive across key financial metrics and further our strategic objectives.
Our first objective is to grow production and EBITDA, while living within cash flow.
Third quarter oil production increased nearly 50% sequentially as we wrapped up the remainder of our mid year liquids development.
For the full year, we increased our production guidance by 4% at the midpoint and we now expect 16% growth year over year.
Inclusive of acquisitions, our exit rate production in December should increase roughly 40, 45% year over year.
Okay.
We also increased our free cash flow guidance for the third time this year and now expect free cash flow in the range of $80 million to $90 million.
A 70% increase at the midpoint from our prior range.
Our updated guidance implies a reinvestment rate of 60% and our free cash flow yield greater than 20%.
Okay.
Our second objective is focused on expanding our inventory through Austin chalk delineation and accretive acquisitions.
Our recent acquisitions and five to six years of rig life.
And drilling inventory spanning both the Eagle Ford and Austin chalk.
In regards to organic development, we brought our second web County, Austin chalk well online during the third quarter.
As Steve will detail further.
Well has produced over 12 M. Mcf per day on average through the first 60 days and is performing similar to the first well.
In addition, we recently brought online our third Austin chalk well in Webb County, and we like what we're seeing from the early results.
Year to date, we have added over 50, Austin chalk drilling locations in Webb County through M&A, and our successful appraisal and development program.
Our third objective.
<unk> is to drive peer leading capital efficiency and cost structure.
We have continued to reduce our D&C costs per lateral foot this year.
Which are 14% lower in 2021 compared to 2020.
In the third quarter, our efficiency gains equated to roughly 9 million of savings on our completion costs.
Furthermore, we lowered our full year G&A guidance.
And do not expect a material change to G&A, even as we integrate the recent acquisitions.
Our lean cost structure allows us to generate attractive full cycle returns.
And silver bow is at the high end of our peers on free cash flow yield, which we highlight on slide 27 of our presentation.
Last but not least we seek to delever, our balance sheet through debt reduction and accretive transactions.
Year over year, we reduced our total debt by $55 million.
And have paid down 92 million of total debt since the end of the first quarter of 2020.
At quarter end, our leverage ratio was one seven times.
Down from two five times at year end 2020.
Okay.
We anticipate our leverage to further decreased to 125 times by year end.
We also expect to significantly increase our liquidity as we generate free cash flow and complete our semiannual borrowing base redetermination in the coming weeks.
We plan to resume drilling at La Mesa in December and as we look into next year. Our latest expectation is to run at a one rig pace throughout 2022.
Compared to an approximately.
It's a three quarter rig run rate this year.
This will drive double digit annual production growth inclusive of full year contributions from recent acquisitions.
At the same time, we expect to reinvest approximately 75% of our free cash flow as warranted by our return thresholds.
Reinvesting at the right time, and the right wells provides for increased EBITDA sustained free cash flow and lower leverage as we look to 'twenty two and beyond.
Our recently acquired properties and the associated Eagle Ford and Austin chalk locations only.
Add to that equation.
With that I will turn the call over to Steve to provide an operational update.
Steve. Please go ahead.
Thank you Sean.
In the third quarter, we drilled six net wells and completed 11 net wells.
Our completion activity was focused on the remainder of our midyear liquids development program.
The majority of which was in our Lasalle condensate area. We also delivered these completed wells $9 million below planned AFB cost.
As we reduce our cycle times and further optimize well designs.
And our Lasalle condensate area, we are seeing strong well performance from our recent development program.
We brought online a two well pad with a 30 day rate of 2500 Boe per day, and a 72% liquids cut.
We also brought online a four well pad with a 30 day rate of 4200 Boe per day, and a 78% liquids cut.
And our mcmullin oil asset we brought a single well online in the N B our area.
This confirmation well is currently outperforming expectations and provides additional inventory of high return oil locations.
As Sean mentioned, the Austin Chalk has been a key area of focus for silver bow this year.
In February we brought online our first Austin chalk well in Webb County.
This well has cumulatively produced two seven Bcf or about 11 M. M. C. F per day on average over the first 250 days.
In August we brought online our second web County, chalk well, which has produced over 12 M. Mcf per day through the first 60 days or more than 0.6 Bcf cumulatively.
In addition to our successful Austin Chalk program that has added 50 drilling locations. We have added significant inventory through our recent acquisitions.
As shown on slide eight of our presentation, we outline our high return inventory that exists across our asset base.
On the operational efficiency front, our team continued to reduce cycle times during the quarter as our drilling times averaged approximately seven days per well in the third quarter compared to nine days in 2020.
As shown on slides 21, and 'twenty two of our presentation, we drilled 10% more feet per day compared to 2020.
On the completion side, we completed 3% more stages per day, and reduce completion cost per well by 17%.
Taken together, we reduced our total D&C cost per lateral foot by 14% compared to 2020.
On our last call in August, we announced and closed an acquisition of incremental working interest in adjacent acreage at our La Mesa position in Webb County.
Later in the month, we announced a second acquisition of 40000 net acres in the Eagle Ford, which bolstered our AWP and southern Eagle Ford positions.
<unk> also expanded our footprint north into the oil window of <unk> County, and to the northeast and to say it in Lavaka counties.
In October we announced a third acquisition of 17000 net acres in the oil window of Lasalle Mcmullin de wit and Labaki counties.
Altogether. These three acquisitions bring an additional 5500 Boe per day of production 85, net producing wells and over 200 future drilling locations in the Eagle Ford and Austin chalk formations.
Second acquisition closed on October one and we expect the third acquisition to close later this year.
Our team is currently in the process of integrating these assets into silver both larger operating structure and we expect to realize cost synergies across these assets as a result of greater size and scale.
Our third quarter production averaged 212 M. M C F E per day near the high end of guidance.
As a result of the well performance in our Lasalle condensate area.
Third quarter oil production increased nearly 50% sequentially.
Silver will also continued its streak of zero recordable incidents and as mentioned before a cultural point of pride amongst our organization.
It has been over 1200 days since our last lost time accident and over 800 days since our last recordable incident.
For the fourth quarter, we are guiding to a production range of 240 to 250 M. M. C. S E per day with natural gas representing 75% at the midpoint.
For full year 2021, we are increasing our production guidance to a range of 210 to $2 15 M. M. C F E per day.
Our guidance includes the impact from the two acquisitions, which are closed.
We expect to deliver 16% production growth year over year.
It pertains to service and supply costs. We are currently experiencing various pockets of inflation for select markets on both the capital and operating sides of the business.
Much of the inflationary impact is around price increases for tubular goods trucking pressure pumping proppant production chemicals and labor.
To date, we have been able to commercially offset these cost pressures through improved efficiencies and other optimizations. However, we are planning for a net increase of 7% to 10% and capital costs and 3% to 5% and operating costs as we as we look forward towards year end and 2022.
Maintaining a low cost structure has been key to silver both success and we expect to continue this competitive cost structure for the foreseeable future as we work with our vendors and critical contractors.
Capital expenditures for the third quarter totaled 51 million on an accrual basis, our full year Capex guidance is unchanged at $115 million to $130 million.
However, given the cost savings identified in the third quarter and a favorable returns environment.
We have completed four Rio Bravo wells, which are now online.
These wells were originally planned to be completed in early 2022.
Additionally, we plan to resume drilling at our La Mesa asset in December.
With the majority of our full year capex being incurred through the third quarter.
The fourth quarter is expected to generate substantial free cash flow.
While we are in the process of finalizing our drilling schedule and capital budget for next year, our balanced portfolio will allow us to remain flexible and adaptable to market conditions.
As always we continue to operate with a strict returns driven mindset in regards to any future development.
With that I will turn it over to Chris Thanks, Steve and good morning, everyone.
In my comments. This morning, I will highlight our third quarter financial results as well as our price realizations hedging program operating cost and capital structure.
For the third quarter revenue was $99 million, excluding derivatives with natural gas, representing 77% of production and 63% of oil and gas sales.
For the quarter, our realized oil price was 97% of Nymex W. T. I a realized gas price was 103% of Nymex Henry hub and our realized NGL price was 44% of Nymex W. T.
Notably our realized gas price was 13 per mcf higher than the benchmark Henry hub prices highlighting the attractiveness of operating in the Gulf Coast markets.
Our realized hedging loss on contracts for the quarter was approximately $19 million.
Based on the midpoint of our guidance and our hedge book as of October 29th our total estimated production is 64% hedged for the remainder of 2021.
The company has 66% of natural gas production hedged, 73% of oil hedged and 44% of Ngls hedge.
For 2022, Silver Bow has 113 Mcf per day of natural gas production hedged and approximately 3000 barrels.
Per day of oil hedged.
The hedged amounts are inclusive of both swaps and collars a detailed summary of our derivative contracts is contained in our presentation and Form 10-Q filing for the third quarter of 2021, which we expect to file later today.
Risk management is a key aspect of our business and we are proactive in adding oil and gas basis in calendar month average roll swaps to further supplement our hedging strategy is.
As shown on slide 26 of our corporate presentation, we have historically realized prices close to Nymex benchmarks.
Turning to cost.
Lease operating expenses were 38 cents per Mcf E transportation and processing costs were <unk> 30 per Mcf fee production.
Production taxes were 5% of oil and gas sales.
Adding our L O E.
T M P and production taxes together total production expenses were 93 per Mcf E continue.
Continuing our trend of total production expenses of less than $1 per Mcf.
Cash G&A costs for the quarter were $4 million, a 15% decrease year over year four.
For the full year, we lowered our cash G&A guidance to below $60 million and do not anticipate a meaningful increase to G&A related to our recent acquisitions.
We consider our lean cost structure to be a competitive advantage, allowing silver bow to sustained profitability during periods of volatile commodity prices.
Adjusted EBITDA for the quarter was $58 million exclusive of amortize derivative contract gains and pro forma contribution from closed acquisitions.
As reconciled in our earnings materials, we generated a slight deficit in cash flow during the quarter. This was a timing effect as a large portion of our full year D&C spend occurred in the third quarter as Steve noted, we identified a significant amount of savings on our D&C spending which helped to offset some of the timing impact to cash flows.
For the full year, we have increased our cash flow guidance from a midpoint of $50 million to a midpoint of 85 million a 70% increase.
Turning to our balance sheet, we reduced our total debt by $55 million year over year and held our debt flat quarter over quarter strong cash flows and proceeds from our ATM program allowed us to hold our net debt flat in a quarter in which had a $13 million cash outlay for acquisition payments and 51.
For Capex.
The $51 million represents 40% of our full year Capex budget.
In regards to our ATM program during the quarter, we issued roughly 700000 shares and raised approximately $13 million in net proceeds as I mentioned this raise offset the cash payment from one of our recent acquisitions.
As of September 30th we had $198 million outstanding under our credit facility approximately approximately $1 million of cash on hand, and $103 million of liquidity.
The company is currently undergoing its semiannual borrowing base redetermination and anticipates, a sizable increase to the availability under its revolving credit line I would like to thank our bank syndicate for their continued support and look forward to constructively working with him as we further our Eagle Ford and Austin chalk consolidation efforts.
In conjunction with the unwinding of oil derivative contracts related to production periods in 2020 and 2021.
Silver Bay was able to amortize $38 million. It received in March of 2020 as add back gains and discrete amounts extending from April 2020 through December of 2021.
The amortized hedge gains factor into silver both adjusted EBITDA EBITDA calculation for covenant purposes over the same time period and therefore, it is important for our investors and research analysts to understand when to tracking our leverage ratio.
Additionally, silver bow includes pro forma contributions from acquired assets and adjusted EBITDA for purposes of calculating its leverage ratio for the third quarter of 2021, the add backs totaled approximately $5 million.
On a last 12 month basis, the AD the AD back totaled $27 million, bringing our LTM adjusted EBITDA for covenant purposes to $229 million and our quarter end leverage ratio to 173 times.
At the end of the third quarter, we were in full compliance with our financial covenants and had sufficient headroom and with that I will turn it over to Sean to wrap up our prepared remarks.
Thanks, Chris.
To summarize silver bow is positioned to grow EBITDA and expand inventory, while generating substantial free cash flow and delevering the balance sheet.
The recent strength in commodity prices broadens the broadened.
Broadens the Optionality of our high return inventory as evidenced by the real time optimizations, we make to our development program.
Year to date Silver BOE has been one of the best performing oil and gas stocks across all market caps, both large and small.
We continued to deliver on accretive and organic growth while remaining opportunistic in the market.
Our winning strategy is built on solid execution efficient operations financial resilience in a low cost structure.
We see we see additional tailwind to our outlook given the favorable price environment continued strengthening of our balance sheet and ongoing Eagle Ford expansion and Austin chalk delineation.
It is an exciting time to be at silver Bowl.
What sets us apart from others is our quality assets exceptional track record and strong capital structure.
As it stands today, we have all three are in place and our culture designed to harness the full potential of our greatest asset.
Our people.
We look forward to providing further updates on our next call.
With that I will turn the call back to the operator for questions.
At this time I would like to remind everyone. If you would like to ask.
A quick question.
When you are talking about.
Your first question comes from the line of Neal Dingmann, let's for Securities.
Good morning, and afternoon guys Sean.
Obviously year to data M&A has been quite good my question is.
Just wondering out there.
Does the M&A market you know given the run up we've seen in prices doesn't like it.
Robust out there.
These are preference these days look more towards the oil or the gas side.
Yeah, Hey, good morning, Neal Yeah, we continue to see.
A number of assets in market are in the Eagle Ford.
Across both the gas and oil windows.
We're open to expanding our position on both commodities.
As we look to <unk>.
Further balance our inventory position going forward.
You know your comment of run up in prices are obviously sits our expectations are higher from the seller side, but we're going to continue to be very pragmatic and thoughtful on any transactions, we do and target transactions that grow our inventory while at the same time keeps our leverage.
At where we're currently at or accretive to our current position. So very happy with the deals we've done and we've done them from an accretive valuation standpoint, and look forward to trying to get additional transactions done here as we move into 2022.
No.
So far and then I am just wondering obviously, a nice nice upside in the Austin chalk just wondering.
Oh, it's on.
Got to change on that let's say, even a plan I know you don't have to budget now.
Or.
Just thoughts now on that play out.
Yeah.
Yeah.
Definitely Austin chalk the first two wells, where we have at least 60 days days of data on both look very attractive and rank very high in our inventory.
In terms of returns we did just recently bring on a third well.
That well has been on just a couple of weeks, but is tracking similar to the first two wells performance. So as we think about next year are we our current plan is to continue expanding our Austin chalk.
Drilling.
And start to look at are probably some spacing test as we get into 'twenty two as well so very excited about the opportunity set there and we continue to look for additional acquisition opportunities in the western Austin chalk trend as well as grassroots leasing opportunities.
Alright, good thanks.
I appreciate the questions.
Your next question comes from the line of Charles Meade with Johnson Rice.
Hi, Good morning, this is Michael Ferro filling in for Charles.
Good morning, Michael.
Hi, So it's kind of hit on it already a little bit, but just kind of going back to the A&D market.
You all have announced three deals since August you know, adding over five years of inventory in a pretty short period. So obviously that market is looking pretty odd.
Opportunistic right now.
How should we expect the current pace you guys are making deals out to change if at all and you know could you give us more inside of some potential deals that you all might be.
Looking at now.
Yeah No a great question you know we've been very active in the A&D market in the basin for a number of years.
Through that activity, we've built relationships with a number of sellers right and so.
Many of these transactions that we've done just didn't occur overnight, but it took time to build relationships with especially with the sellers desire to take silver both stock I think it shows a reflection of the upside that.
Sellers have seen in our stock as well as.
Comfort in the way, we manage properties so.
I would tell you that theres additional relationships that we've built and we continue to have open discussions with a number of folks.
Terms of Telegraphing, our additional deals probably cant do that but we look forward to getting some more transactions across the across the line as we move forward.
Great. Thank you that's a good news to hear.
Sort of a kind of unrelated follow up regarding the full rig you plan on running you know what what sort of operational efficiencies or details can you kind of explain to us how it works.
To us on the sell side that might not be as obvious for us as it is for you all.
Yeah, why don't I, let Steve answer that question.
Yes, Thank you Michael.
Up to date.
<unk> not had a full rig line schedule, we've had an inconsistent rig line schedule here of late so with a full rig line schedule beginning here in the in the middle of December.
Forward through 'twenty, two and likely into 'twenty three it's going to do a couple of things for us one.
We're going to get that not only well to well, but that pad to pad efficiency, we've had a lot of well to well efficiencies. So far but now we're gonna get pad to pad efficiency and then as we design and work through our drill schedule for the year, we're optimizing our rig moves around that so that's on the rig side and then Furthermore, as as I mentioned in comments there.
Where we're seeing some of the greater costs.
At least on the drilling side and casing in oil country tubular goods. This allows us to plan out further and to get some some scale along with that pricing as well as.
Some of the optimizations that go with not only procuring that pipe, but logistically and getting it sourced at the rig level trucking aside so.
There is some sort of some opportunities. There then the other thing about it on the drilling side that gives us opportunity is as we go from area to area. As you know we cover the basin from North to South on the West side and now as we go more towards the east and all of those different bands, we have different opportunities with respect to the muds, we use as well as the the motor.
Please bottom hole assemblies and other tools that we use and this will allow us now to kind of go with focused areas on each one of those whereas before we've kind of maybe had to go back and forth to different areas, a little prematurely because of the drill schedule. So so those those are some of the real clear operational efficiency that we see and then of course, we're always looking at.
Our unit costs not to mention those process costs on that on the completion side it'll take us even further.
We will be able to pretty much lock in with one consistent trailing frac spread and as as many people have commented as and as you know that that consistent frac spread has a lot of inherent efficiencies to it rather than picking up one versus another or even a different company. So we'll be able to maintain that trailing frac spread with a high degree of personnel efficiency.
These process knowledge as well as the way in which we do things from both the downhole perspective as well as the surface logistical support so we're looking for either more efficiencies on that.
The completion side versus that drove on the drilling side and again trucking aside.
Thank you that's a very good color I appreciate you all taking my questions.
Thanks, Michael.
At this time there are no further questions I would like to turn the call back to Sean Woolverton CEO for closing remarks.
Well I want to again, thank everyone for their interest in silver bow in there.
Our call. This morning, we look forward to sharing additional updates with you as we report our year end results in <unk>.
<unk> of next year.
Everyone have a nice day.
This concludes today's conference you may now disconnect.
Okay.
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